November 28, 2008
Sign of the Times: Insolvency Clauses Come the Fore in Stock PUrchase Agreements
For some time a buyer attempting to bust a signed leveraged buyout agreement would rely on the Material Adverse Change Clause, now buyers are relying on insolvency clauses. In the Bell Canada buyout the buyers are claiming that a buyout would result in an insolvent company, triggering walk rights in the buyout agreement. Insolvency clauses are a bit more poignant that MAC clauses, and we will see whether courts are more tolerant of the excuse than they are of MAC clauses.
November 27, 2008
Cerberus Reads Its Covenants
Cerberus has just read the covenants in its stock purchase agreement with Daimler Benz for 80 percent of the stock of Chrysler and has decided that Daimler "intentionally and materially" violated the value of its lease and loan portfolio. This will end up in court on the contract language. Proving again that contract language matters when deals do not work out and that lawyers "bothering" clients about contract language are doing their clients a real, valuable, often under appreciated ("don't kill the deal"!!) service.
Tax Losses and the Banking Crisis
Treasury, by two rule changes, has changed the tax loss carry forward rules for banks. On September 30th, Treasury decided that a buyer of a troubled bank could use all the tax losses of the selling bank to offset the buyer's taxable gains. It was a $100 billion change. In October, Treasury decided that a bank receiving TARP money (bailout funds), could carry forward tax losses longer. The second rule added value to the first, attracting buyers to banks with old tax losses. Now foreign banks want the break, adding that it is unfair that only domestic banks get the benefit of the new rules. Soon other buyers of failing non-banks (auto companies???) will want the benefit of the new rules. This decidedly lack of principled approach to crisis should led to a reexamination of the principle of limiting tax loss carryovers for everyone -- a rule that was borne to limit tax shelter abuse and was applied too broadly. The new rule should be tailored to limit abuse while still permitting liberal use of tax losses in acquisitions where there is no abuse.
November 26, 2008
Tuesday's $800 Billion Credit Market Bailout: An Incentive to Sercuritize??
Monday was the Citigroup bailout and Tuesday was the $800 Billion credit market bailout. The goal of the new bailout is to free up credit in consumer credit markets -- mortgages, car loans, student loans, and credit card loans. The mechanism of choice is interesting -- $200 billion (in a Term Asset Backed Securities Loan Facility --TALF) and $500 billion to buy MBSs (mortgage backed securities) guaranteed by Fannie Mae and Freddie Mac. The government is buying ABSs (asset backed securities) generated by the now notorious securitization process (structured finance). Academics and journalists argue that the securitization process so dilutes accountability that no one is responsible for taking excessive risks (the borrower, the originator, the bundler, the rating company, the underwriter). So to get people to loan we are going to stimulate the securitization process, reward the securitization process, by buying securities securities to encourage more borrowers, originators, bundler, and underwriters. Great.
November 25, 2008
Geithner, The New Treasury Secretary: There is Nothing "New" About Him
The markets soared on Friday on the announcement of Tim Geithner as the "new" Secretary of the Treasury. But just how "new" is he? He was Paulson's "go to guy" as President of the largest Federal Reserve Bank in New York and put together the disastrous AIG bailout, which is still absorbing money. He also was in on Bearn Stearns deal and the decision not to bailout Lehman (which, if we believe whispers, he opposed - very, very quietly perhaps, so quietly no-one heard him). So we have a player in the jerky jerky bailout planning-- which is, as far as I can tell, is to throw loads of money at everything, something will work (the Harvard Law faculty hiring policy) out eventually and they can take credit. Not a great choice; Obama is rewarding those who have made mistakes.
The Citigroup Bailout: More Confusion
The markets hailed the fact of the Citigroup bailout, but we are just now digesting the details. Last month Treasury bought $25 billion in preferred stock and warrants (at-the-market and equal to 10% of the value of the preferred). Yesterday, the Treasury bought an addition $20 billion in preferred stock and warrants. The second batch of preferred stock pays an 8% dividend; the first batch pays 5% for five years and 10% thereafter. The new batch restricts dividends on common to $.01 a share for 3 years without Treasury's consent; the old batch restricted an increase in dividends on common. All the preferred is non-voting. The big change is in control of executive compensation. The new preferred requires that any compensation plans must be submitted to and approved by the "USG." The old preferred had open-ended compensation "standards" and a ban on oversized golden parachutes. But wait.... there is something completely new... a government guarantee on a $306 billion pool of Citi's mortgage-backed securities (not 100% but with total exposure of $249 billion) in exchange for another $7 billion in preferred ($3 billion bought by the FDIC). This new wrinkle fuels the ad hoc nature of bank bailouts and adds to market uncertainty over the bailout program. The FDIC involvement hides a spirited debate between Paulson and Blair over the extent of FDIC exposure, an inter-agency debate that affected the final plan. We also note with much interest that Robert Rubin, the new man behind the scenes in the Obama economic team was on the Citi board. Who is in control here and who is making policy??? Now we wait for the new heavily negotiated, company specific bailout and wonder about transparency, standards and political power. Wonderful way to calm the markets.
The new bailout protects Citigroup debt and does not, yet anyway, dilute the common stock significantly. The price of Citi common rose on the announcement.
November 24, 2008
Sometimes the simple questions are the most revealing. 1) Should a government bailout forces banks to take or apply for money they do not need?? 2) If the government can "spend" its way out of distress and it will eventually get "all its money back" why not spend more than the $7.4 trillion the government already has?? why not spend everything the government can borrow?? The answers to both questions are negative but the government has done 1) and argues 2). Obama has bought into 2).